Flat-Rate Tariffs and Competitive Entry in Telecommunications Markets

Abstract

Flat-rate tariffs have become widespread in the sale of broadband services. Although popular amongst network operators consumers and policy-makers flat-rate tariffs have been implicated in retarding the rate of substitution from legacy to frontier technologies and distorting competitive entry incentives by imposing a disjunction between the prices charged for and the costs of providing services. Flat-rate tariffs impose mandatory wealth transfers between classes of consumers in a similar manner to universal (equalised) pricing obligations. Low-volume consumers are required to subsidise high-volume users thereby depressing the rate at which the flat-rated product diffuses relative to one with a tariff that separates the bundle of connection to the network and usage of it. The tariff also induces entry by higher-cost providers when this is not overall efficiency-raising as long as the entrant can selectively attract only low-volume users (e.g. with a two-part tariff or via selective bundling). Whilst in theory the entry distortions can be corrected with taxes in practice this has proved extremely problematic as it necessitates detecting the degree of adverse selection engaged in and accurately assessing its costs. Flat-rate tariffs are also unlikely to prevail in the long-run in competitive markets where individual consumer usage volumes vary substantially because there is always an incentive for a provider to offer a two-part tariff to selectively attract low-volume consumers. They are likely to prevail only when supported by regulation or collective provider market power but with attendant welfare consequences. Telecommunications policy-makers should therefore exercise some caution before recommending that such tariffs become widely adopted.